Get ready for a taxing, not axing, budget

This year's budget will be more about politics than economics. That is not my prediction. It is what the PM's office has been privately saying for weeks.

On the day that Julia Gillard defeated Kevin Rudd for the leadership on February 27, 2012 her advisers told the press that they were working on a "post trauma" recovery plan.

Geoff Kitney, writing on the front page of the Australian Financial Review on the same day, stated:

"Sources said that the May federal budget would be a critical part of the Government's revival strategy, with the return to a budget surplus in 2012/13 as the centerpiece of a political strategy aimed at rebuilding Labor's credibility and regaining its standing as the party best able to manage the economy."

Government should have political strategies, but not at the expense of good economic management. I suspect that the best thing in this budget will be a surplus. Treasurer Wayne Swan has said so many times that he is aiming for a budget surplus that I can't believe he will not fulfil his own commitment.

If he fails to produce a surplus he should resign.

To reach a surplus Swan will need to cut spending and increase revenue. Labor has not produced a surplus since before Wyatt Roy MP was born. I don't know how Swan will pull this rabbit out of the hat. He has already tried to put some of next year's spending into the current year. He might also shift some of next year's into the year after.

But tricky accounting dodges will not be enough this year.

I expect he will cut some spending; he has no choice otherwise his budget will have no credibility. The public will say if the government is not cutting its spending then clearly taxpayers are going to be paying more. Labor has such a record as a big and wasteful spender on everything from school halls, pink batts, TV set top boxes and Rudd's pursuit of a seat on the Security Council, Swan needs to be seen as tackling the issue.

But despite my expectation that there will be some cuts in programs like foreign aid, my prediction is that a key part of the budget will be increased taxes.

Business will be slugged. Top of that list will be the miners. Julia Gillard negotiated with the big miners to slash the mining tax. Contrary to the claims of her sycophantic supporters, she is a hopeless negotiator and gave away a lot more revenue than she intended. Now Swan is going to get it back.

But it will not be just business. Anyone that Swan can call 'rich' will be in their sights. Labor loves to play the envy card and it will be on the table in this budget. Watch out Gina, Twiggy and Clive and anyone on $90,000 p.a. or more.

The emphasis on raising more tax will mean that the budget will not be an axing budget: it will be a taxing budget.

Labor should have slashed last year, in the first budget after the 2010 election, but instead has been on a spending spree. Their hope is that the economy will give them a lift in the next 12 months so they can resume spending in the May 2013 budget and then head for an election in July or August 2013.

It would also help if the 2013 election is held before anyone knows that the projections for 2012/2013 were not met.

But a budget should not just be about balancing the federal books. It should start with a realistic assessment of the state of Australia's economy and then provide an outline of the government's economic strategies.

The strategies should include cutting debt, improving productivity, improving business competitiveness, protecting jobs, and reform of the labour market.

None of these strategies involve a radical departure from sensible, mainstream economic policy. The question confronting Australian politicians is not what to do but who is prepared to make the reform happen.

Australia must improve its productivity performance and thus ensure continued improvements in living standards. A realistic assessment would note that living standards are under threat for many Australians. And a government that is concerned about its political prospects would appreciate that cost of living concerns have had a major impact in the recent Victorian, New South Wales and Queensland election results .

To really protect jobs in a meaningful way, governments could do a lot more to reduce the costs of doing business. Phoney exercises about cutting red and green tape and other similar gimmicks in recent weeks will not make any real difference.

A fair dinkum strategy should not only give some objective assessments of what is happening in manufacturing but also what will happen when the resources sector finds that demand for its products starts to plateau.

I appreciate that this suggestion will not be embraced any time soon because the budget is likely to increase costs on business, not reduce costs, but it is still the approach that needs to be taken.

And Labor will certainly not include a strategy to improve the operation of the labour market. This is a glaringly obvious problem but clearly beyond Gillard's leadership capability. She can't even distance herself from Craig Thomson, even though the ACTU abandoned the HSU because of the stench of corruption.

Labor has no one on its frontbench that could muster the political will to confront the ACTU and the unions on labour market reform because of the "corrosive impact of Labor factional politics," as Mark Latham wrote in the AFR on April 11, 2012.

It is hard to understand why a government that is floundering in the polls should think that what it needs now is a political strategy. The one thing that Julia Gillard is not good at is politics.

If the PM and her Treasurer could only focus on better economic management then maybe, only just maybe, the Labor Party might do better politically than they are doing now.

The Honourable Peter Reith was a senior cabinet minister in the Australian Liberal government from 1996 to 2001 and then a director of the European Bank for Reconstruction and Development from 2003 to 2009. View his full profile here.